Investing.com — European equities could fall more than 5% by early in the fourth quarter as elevated earnings expectations and low risk premiums leave markets vulnerable to disappointment, Bank of America strategists said.
Recent economic data have been supportive, with global macro surprises reaching a three-year high and European growth improving as inflation eases. Much of that favorable outlook is already reflected in share prices.
Consensus profit-margin expectations for European companies are at record highs, while equity risk premiums are near their lowest levels in two decades. Investors are therefore pricing in a smooth economic and earnings environment.
Artificial intelligence spending is one source of risk. Expected 12-month capital expenditure by U.S. hyperscalers has increased from below $300 billion in early 2025 to more than $800 billion.
Generating acceptable returns on that investment remains uncertain as competition among AI developers increases, memory costs rise, and technology companies use more debt financing. Any reduction in AI spending could hurt European semiconductor and industrial-equipment stocks.
Energy prices present another threat. The base case assumes renewed U.S.-Iran fighting remains contained and ends 2026 below $80 a barrel. Extended disruption could push oil above $100, particularly as inventories of gasoline, diesel, and jet fuel remain tight.
Weakness in the U.S. labor market could also slow global demand, while stress in private credit may signal the beginning of a new default cycle. Wider credit spreads have historically accompanied higher equity risk premiums and weaker stocks.
The preferred positioning remains defensive, with overweights in food and beverages, pharmaceuticals, and telecommunications. Semiconductors, capital goods, and banks remain underweight.
Dated Brent has risen about 20% to $82 since tensions resumed, while European equities have fallen roughly 2% from their early-July record.